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A  REVIEW 


OF 


LIFE  INSURANCE 

FROM   THE   DATE   OF  THE 

FIRST  NATIONAL  CONVENTION 
OF  INSURANCE  OFFICIALS.  .  .  . 

1871-1897. 

AN  ADDRESS  BY 

JOHN  A.  McCALL,  President 

OF  THE 

NEW-YORK  LIFE  INSURANCE  Co. 


BEFORE  THE 


TWENTY-EIGHTH  NATIONAL  CONVENTION. 


Milwaukee,  Sept.  13-16,  1898. 


....A.... 

Review  of  Life  Insurance 

FROM  THE  DATE  OF  THE 

FIRST   NATIONAL   CONVENTION 
OF  INSURANCE   OFFICIALS. 


PRELIMINARY. 

AT  the  time  of  the  meeting  of  the  First  Con- 
vention of  Insurance  Officials,  in  May, 
1871,  American  Life  Insurance  had  passed 
through  two  distinctive  periods,  and  had  nearly 
reached  the  end  of  a  third.  In  the  first  period 
life  insurance  was  done  almost  entirely  by 
proprietary  companies,  organized  primarily  for 
the  transaction  of  fire  insurance,  banking  and 
trust  business.  Following  this  came  the  period 
of  the  early  mutuals  and  other  profit-sharing 

3 


companies,  doing  a  life  insurance  business 
exclusively.  The  marked  success  of  these 
organizations,  between  1843  and  1862,  caused 
a  great  multiplication  of  life  companies.  Life 
Insurance  shared  the  fate  of  other  industries  of 
the  time — flourished  and  grew  with  them — as 
later  it  suffered  with  them.  From  1862  to 
1870  the  number  of  companies  reporting  to 
the  New  York  Department  increased  from 
eighteen  to  seventy-one — the  latter  being  the 
highest  number  ever  reported.  During  the 
same  period  the  insurance  in  force  and  the 
gross  assets  increased  over  ten-fold.  In  eight 
years  over  two  hundred  and  thirty  million  dol- 
lars were  added  to  assets,  and  over  eighteen 
hundred  millions  to  risks  in  force. 

During  this  period  State  supervision  in 
New  York  became  full-fledged.  It  was  begun 
in  a  mild  form  under  the  Revised  Statutes  of 
1828,  which  required  all  moneyed  corporations 
thereafter  created  to  make  annual  reports  to 
the  State  Comptroller.  This  provision  was 
continued  in  the  first  general  Insurance  Act  of 
April  10,  1849,  and  compliance  with  its  re- 
quirements by  foreign  companies  was  made  a 

4 


condition  of  their  admission  to  the  State.  A 
deposit  with  the  State  for  the  protection  of 
policy-holders  was  first  required  by  the  Act  of 
April  8,  1851,  and  under  this  Act  the  Comp- 
troller was  given  authority  to  make  official 
examinations  of  companies.  This  Act  also 
made  the  possession  of  a  re-insurance  fund  a 
necessity,  and  required  a  company  to  be  dis- 
solved if  its  assets  were  not  sufficient  to  re- 
insure its  outstanding  risks.  The  general  Life 
and  Health  Insurance  Law  of  1853  required 
the  companies  to  report  a  classified  statement 
of  all  policies  in  force,  together  with  the  data 
necessary  for  an  official  valuation  of  policy 
liabilities.  The  Act  of  April  15,  1859,  creat- 
ing the  Insurance  Department,  made  no  new 
requirement  of  the  companies,  but  transferred 
to  the  Superintendent  the  authority  over  them 
formerly  exercised  by  the  Comptroller.  A 
standard  of  solvency  was  first  adopted  by  law 
in  1866,  the  English  Life  Table  No.  3  for 
Males,  with  interest  at  five  per  cent.,  being 
chosen.  In  1868  the  standard  was  changed  to 
the  American  Experience  Table,  with  interest 
at  four  and  one-half  per  cent.  The  first  official 

5 


valuation  of  the  policy  liabilities  of  all  com- 
panies doing  business  in  the  State  was  made 
as  of  December  31,  1869.  The  second  annual 
valuation,  made  December  31,  1870,  showed 
seventy-one  solvent  companies  with  $2,000,- 
000,000  of  insurance,  $269,000,000  in  assets 
and  $48,000,000  in  surplus.  At  this  time  six 
other  States  had  adopted  the  New  York  stand- 
ard, while  four  States  stood  with  Massachusetts 
for  the  Actuaries'  Table,  with  four  per  cent, 
interest ;  Iowa  had  anticipated  the  financial 
discussions  of  our  day  by  adopting  a  double 
standard.  Such  was  the  condition  of  the  com- 
panies and  such  the  standards  of  solvency 
at  the  assembling  of  the  First  Convention  of 
Insurance  Officials  in  May,  1871. 

THE  CONVENTION. 

What  were  the  burning  questions  of  the 
time  may,  perhaps,  be  best  judged  by  noting 
those  which  most  occupied  the  attention  of  the 
Convention.  These  were  (i)  a  uniform  blank 
for  the  use  of  companies  in  making  their  an- 
nual reports,  and  the  acceptance  by  each  De- 
partment, within  the  limits  of  existing  law,  of 

6 


the  certificates  of  other  Departments,  as  to  valu- 
ations and  assets  of  home  companies;  (2)  uni- 
form methods  of  valuation,  including  table  of 
mortality  and  rate  of  interest;  (3)  uniform 
insurance  laws,  including  uniform  taxation  of 
life  companies ;  (4)  the  best  method  of  dealing 
with  insolvent  companies. 

The  first  of  these  subjects  being  within  the 
purview  of  the  Convention,  a  uniform  blank 
was  adopted  and  recommended  to  the  various 
Departments.  This  form  was  so  modified  in 
1875  that  reports  should  present  a  perfect 
balance-sheet,  and,  with  slight  amendments,  it 
has  been  continued  until  the  present  time. 
Upon  other  subjects  named  the  Convention 
could  only  make  recommendations.  The  re- 
port of  the  Committee  on  mortality  table  and 
interest  rate  was  presented  at  the  October 
session  and  fills  over  90  printed  pages,  while 
the  papers,  addresses  and  letters  on  the  sub- 
ject occupy  150  pages  more.  All  this  was  in 
addition  to  the  extended  discussions  had  dur- 
ing the  sittings  of  the  Convention.  The 
American  Table  of  Mortality,  with  four  and 
one-half  per  cent,  interest,  was  finally  recom- 


mended  by  a  vote  of  23  to  3.*  Judging  from 
the  attention  it  received,  this  was  considered 
the  most  important  question  before  the  Con- 
vention. The  companies,  as  a  whole,  expressed 
no  preference  for  any  particular  table  of  mor- 
tality or  rate  of  interest ;  but,  in  response  to 
a  request  of  the  Convention  to  lay  before  it 
such  matters  as  they  deemed  of  importance  to 
be  considered,  they  urged  uniformity  in  the 
forms  of  annual  reports,  the  adoption  of  the 
same  basis  and  system  in  valuations,  the  in- 
terchange of  certificates  of  valuation  and  assets, 
the  deposit  of  securities  in  one  State  only,  the 
appointment  of  one  agent  or  attorney  only  in 
each  State  for  service  of  process,  and  uni- 
formity in  taxation. 

A  draft  of  a  reciprocal  insurance  law  was 
reported,  discussed  and  finally  recommended 
to  the  several  States  for  adoption.  A  resolu- 
tion to  the  effect  that  it  was  impolitic  to  tax 
life  insurance  premiums  was  lost  by  a  vote  of 
13  to  8,  and  a  resolution  to  the  effect  that  the 

*  Mr.  William  E.  Harvey,  of  Illinois,  announced  that  he  was 
under  instructions  to  vote  for  the  Actuaries' Table  unless  a  unanimous 
vote  could  be  obtained  for  some  other  standard.  Report  second  ses- 
sion, pp.  216,  220. 

8 


tax  on  premiums  should  not  exceed  one  and 
one-half  per  cent,  was  adopted  by  a  vote  of  13 
to  10.*  The  Secretary  of  the  Convention  com- 
piled a  table  showing  the  taxes  imposed  on 
Life  Insurance  by  the  various  States  and  Terri- 
tories in  1870,  and,  in  order  to  ascertain  whether 
the  former  times  were  better  or  worse  in  this 
respect  than  the  present,  I  have  had  made  up 
a  table  showing  what  taxes  the  New- York 
Life  Insurance  Company  paid  in  1897  in  each 
State  and  Territory  of  the  United  States,  and 
what  it  would  have  paid  in  each  had  the  laws 
been  the  same  as  they  were  in  1870. 

The  table  shows  an  increase  in  taxation  by 
States  having  tax  laws  in  1871,  of  about  three- 
fourths  of  one  per  cent,  for  the  same  amount 
of  business.  In  twenty-two  States  taxes  are 
higher  than  in  1871,  and  in  seventeen  States 
they  are  lower.  The  most  striking  feature  of 
the  table  is  its  inequalities.  In  twenty-five 
States  and  Territories,  where  the  Company 
had  $317,000,000  insurance  in  force  in  1897, 
it  paid  $23,000  in  taxes  ;  in  twenty-four  other 
States  and  Territories,  where  it  had  $313,000,- 

*  Report  second  session,  pp.  183-4. 
9 


ooo  insurance  in  force,  it  paid  $207,000  in 
taxes.  The  taxation  of  Life  Insurance  cannot 
be  said  to  be  founded  on  any  recognized  prin- 
ciples of  equity  or  of  political  economy  when  in 
one-half  of  the  Union  it  is  taxed  nine  times  as 
heavily  as  it  is  in  the  other  half. 

COMPARATIVE  RESULTS  OF  TAX  LAWS  IN  1871  AND  1897  ON  THE 
BUSINESS  OF  THE  NEW- YORK  LIFE  INSURANCE  COMPANY. 


STATE 
OR  TERRITORY. 

Total  amount 
paid  in  1897, 
under  laws  then 
in  force. 

Amount  which 
would  have  been 
paid  in  1897  on 
basis  of  laws 
current  in  1871. 

Insurance  in 
force 
Dec.  31,  1897. 

Alabama 

$2,840.58 
991.23 
1,306.29 

729.85 
5,231.89 
306.00 
402.48 
1,176.69 
4,023.56 
7,370.61 
97.00 
1,402.74 
10,588.58 
12,806.58 
256.67 
I4,2IO.2O 
3,715-10 
289.44 
5,766.05 
l6,593-84 
8,539-15 
5,501.96 
1,552.00 
17,882.46 
2,154.75 
133.19 
IOO.OO 

607.68 

$4,776.96 

$6,951,000 
2,097,000 
3,183,000 
20,015,000 
7,727,000 
8,471,000 
778,000 
3,545,000 
5,800,000 
14,609,000 
3,OO2,OOO 
51,798,000 
14,538,000 
18,188,000 
7,099,000 
18,770,000 
16,508,000 

3.957,000 
7,463,000 
26,563,000 
12,392,000 
10,238,000 
8,292,000 
29,215,000 
4,862,000 
7,272,000 
1,108,000 
1,888,000 

Arizona 

Arkansas 

2,402.69 
6,454.66 
5,088.64 
5,920.06 
745^4 
1,155-94 
490.00 
6,28l.6l 

California 

Colorado  

Connecticut 

Delaware 

Dist.  of  Columbia. 
Florida   . 

Georgia 

Idaho 

Illinois 

2,900.00 
262.50 
711.00 
4,598.52 
16,289.33 
7,130.96 
103.00 

3>9i3-85 
8,300.72 
12,795.27 

Indiana 

Iowa 

Kansas    . 

Kentucky 

Louisiana  

Maine     .    

Maryland 

Massachusetts  
Michigan  

Minnesota 

Mississippi 

2,082.50 
500.00 

Missouri    

Montana          .... 

Nebraska 

111.19 
1,137.68 
487.68 

Nevada 

New  Hampshire  .  . 

IO 


COMPARATIVE  RESULTS  OF  TAX  LAWS—  Contimted. 


STATE 
OR  TERRITORY. 

Total  amount 
paid  in  1897, 
under  laws  then 
in  force. 

Amount  which 
would  have  been 
paid  in  1897  on 
basis  of  laws 
current  in  1871. 

Insurance  in 
force 
Dec.  31,  1897. 

New  Jersey  

$335-oo 
226.00 

$7,867.70 

$15,754,000 
3,064,000 
123,413,000 
5,489,000 
1,529,000 
28,367,000 
1,136,000 
3,601,000 
45,506,000 
4,171,000 

6,537,000 
2,833,000 
7,815,000 
25,828,000 
3,456,000 
4,800,000 
9,075,000 
4,545,000 
3,234,000 
12,204,000 
1,425,000 

New  Mexico 

New  York 

8,675.00 
1,800.29 

North  Carolina  .  .  . 
North  Dakota  
Ohio  

3,682.58 
1,310.06 
23,920.81 
142.06 
883.30 
31,746.29 
2,752.06 
5,092.04 
1,873.62 
6,132.44 
10,628.62 
1,565-63 
3,810.52 

3*839.37 
1,813.31 
2,057.41 
451.00 
934.40 

19,519.84 

Oklahoma 

Oregon  .  

145.00 
47,429.43 
2,861.06 
205.00 

Pennsylvania. 

Rhode  Island  
South  Carolina  .  .  . 
South  Dakota  
Tennessee  

4,438.86 
5OO.OO 

Texas  . 

Utah 

Vermont  

2.OO 

7,679.76 

Virginia  .  .  . 

AVashin  crton 

West  Virginia  
~W\  scon  sin 

1,838.71 
4O8.OO 
364-95 

Wyoming  

$229,773.09 

$198,376.00 

$630,111,000 

The  Committee  on  Winding  Up  Insolvent 
Companies  reported  a  plan,  which  was  laid 
upon  the  table  until  the  next  year.  Speaking 
of  this  action  Mr.  Harvey,  of  Missouri,  who 
was  a  member  of  the  Committee,  said  in  a 
paper  read  before  the  Convention  of  1890: 

"  There  was  a  unanimous  conviction  that 
the  prospect  at  that  time,  under  the  existing 


ii 


inflation  of  values,  had  a  dangerous  aspect, 
but  where  or  how  soon  the  wrecks  were  to 
begin  no  one  dared  predict ;  and  yet  no  mem- 
ber, nor  the  committee  to  which  was  given  the 
matter  of  devising  the  skeleton  of  a  uniform 
insurance  law  for  all  the  States,  seemed  to 
think  it  worth  while  to  suggest  immediate  leg- 
islation, under  which,  if  the  storm  did  burst, 
some  of  the  craft  might  be  saved.  In  the  law 
which  was  proposed  at  the  fall  session,  a  sec- 
tion looking  to  the  possible  recovery  of  an 
impaired  company  was  incorporated ;  but  sub- 
sequent events  have  shown  that  its  application 
would  have  been  a  remedy  to  kill,  not  cure."* 
The  method  incorporated  in  the  proposed 
law  differed  but  little  from  the  method  pursued 
with  such  disastrous  results  under  the  laws  of 
New  York  in  the  years  immediately  following. 
The  method  proposed  by  the  Committee  had 
the  merit  of  keeping  an  insolvent  company 
together,  applying  the  assets  on  hand  to  the 
purchase  of  paid-up  insurance,  and  devoting 
all  future  premiums  received  to  the  purchase 
of  new  insurance  at  a  rate  adjusted  to  attained 

*  Official  report,  pp.  18,  19. 

12 


age.  There  was  really  no  question  before  the 
Convention  of  such  pressing  importance  as 
this,  and  the  long  debates  over  tables  of  mor- 
tality and  rates  of  interest  might  well  have 
been  spared,  if  a  just  and  workable  measure 
for  saving  insolvent  companies  from  the  waste 
of  receiverships  could  have  been  devised  and 
urged  upon  the  attention  of  legislators.  The 
"  unanimous  conviction  "  of  danger  spoken  of 
by  Mr.  Harvey,  was  well  founded.  The  of- 
ficial valuations  of  December  3ist,  preceding, 
showed  an  impairment  of  the  capital  stock 
of  twenty-nine  companies  by  the  New  York 
standard,  and  of  thirty-six  companies  by  the 
Massachusetts  rule.  Superintendent  Miller,  of 
New  York,  who  called  the  Convention  and 
presided  over  its  deliberations,  had  made  nu- 
merous examinations  of  life  companies  in  1870, 
and  as  a  result,  two  New  York  companies 
and  two  British  companies  had  been  obliged 
to  cease  doing  business.  The  fate  that  befell 
policy-holders  in  these  four  organizations  was 
typical  of  that  which  was  in  store  for  those  of 
thirty-two  of  the  thirty-six  companies  already 
referred  to,  as  showing  an  impairment  of  capital 


under  the  Massachusetts  standard — one  was 
wound  up  by  a  receiver  who  paid  about  25 
cents  on  the  dollar,  while  the  other  three  were 
re-insured  in  companies  that  either  failed,  or 
were,  in  turn,  re-insured  in  other  companies 
that  failed. 

Before  considering  the  events  of  the  period 
immediately  following  1871,  it  may  be  well  to 
glance  at  some  features  of  the  policy  contract 
at  this  time.  All  policies  contained  numerous 
restrictions  upon  residence,  travel,  occupation, 
habits  of  life  and  manner  of  death,  under  which 
a  policy  might  be  canceled  or  become  void. 
There  was  no  incontestable  clause.  Ordinary 
Life  policies  issued  prior  to  about  1868,  and 
all  policies  issued  prior  to  1860,  contained  no 
non- forfeiture  conditions.  Dividends  in  most 
companies  were  declared  annually,  and  were 
generally  available  in  the  reduction  of  annual 
premiums,  or  were  added  to  the  policies  in  the 
form  of  paid-up  insurance.  In  1868  the  Equi- 
table had  begun  the  issue  of  a  deferred  dividend  , 
policy — which  was  forfeitable  for  non-payment 
of  premium  during  its  first  dividend  period, 
such  period  being  fixed  by  the  time  required 


for  the  annual  premiums,  compounded  at  ten 
per  cent,  per  annum,  to  amount  to  the  face  of 
the  policy.  In  1870  the  Mutual  began  the 
issue  of  policies  which  were  forfeitable  for  non- 
payment of  premium  during  the  first  dividend 
period  of  10,  15  or  20  years.  In  1871  the 
New- York  Life  began  the  issue  of  a  lo-year 
dividend  policy  which  was  forfeitable  for  non- 
payment of  premium  during  the  first  dividend 
period.  These  policies  did  not,  however,  con- 
tain the  options  in  settlement — including  cash 
surrender  value — afterward  incorporated  in 
deferred  dividend  policies  by  these  and  other 
companies. 

A  PERIOD  OF  DISASTER. 

The  nine  years  immediately  following  the 
First  Convention  must  be  accounted  the  most 
trying  period  in  the  history  of  American  Life 
Insurance.  The  number  of  companies  which 
ceased  doing  business  in  New  York  was  forty- 
six.  Only  four  re-insured  in  companies  that 
remained  solvent;  only  ten  others  paid  their 
liabilities  in  full.  Receivers'  reports  are  incom- 
plete, but  a  careful  examination  of  such  as  are 


OF  THE 

UNIVERSIT 


LOSSES  IN  NEW  YORK  COMPANIES. 


NAME  OF  COMPANY. 

Cash 
Liabilities. 

Cash 
Dividends. 

Loss  to 
Policy-holders. 

I.  Continental  

$4.821  OA8 

$1  344  066 

$3  476  082 

2.  Globe 

3  268  821 

I  Q2I  OO2 

I  34.7  8lQ 

3.  Guardian 

I  727  282 

376  080 

I   3^1    IQ3 

4.  Knickerbocker  

•3  06"?  7o8 

68  1;  344 

*>oji>iyj 

2  780  364 

5.  North  America  

2.Q2'?,  82Q 

087,012 

I.Q3C  QI7 

6.  Security  Life  and  Annuity 
7.   Universal 

2,474,968 
2  8l2  SQQ 

259,764 
2OO  OOO 

2,215,204 
2  6l2   tjQQ 

Twelve  small  companies. 

3,835,642 

1,815,804 

2,019,838 

TOTALS  

$24,020,807 

$7,c8Q,o8i 

$I7,330,Ol6 

1.  Includes  American  Tontine,  Farmers  and  Mechanics  and  Empire  Mutual. 

2.  Includes  Merchants'  Life.    Dividends  include  $100,000  of  net  shortage  of  $129,550 
in  Expenditures  from  incomplete  receivers'  reports. 

3.  Includes   Amicable,    Widows   and    Orphans   Benefit  and   Mutual   Protection 
(changed  to  Reserve  Mutual),  and  New  York  State  Life. 

4.  Cash  Dividends  include  $75,000  of  $109,873  on  hand  December  31,  1886,  and 
not  reported  on. 

5.  Includes  Standard  and  Government  Security. 

7.  Liabilities  include  $1,500,000  for  loss  in  scaling  policies  in  1878.  Receivers'  re- 
ports incomplete;  difference  between  receipts  and  disbursements,  $222,763; 
dividends  estimated. 

LOSSES  IN  OTHER-STATE  COMPANIES. 


NAME  OF  COMPANY. 

Cash 
Liabilities. 

Cash 
Dividends. 

Loss  to 
Policy-holders. 

I.  New  Jersey  Mutual,  N.  J. 
2.  Piedm't  &  Arlington,  Va. 
3.  Republic  111.. 

$1,006,185 
822,060 
I    TOO  <^OO 

$41,024 

52,384 
74.6  112 

$965,161 
769,676 
7S4.388 

4.  Charter  Oak,  Conn  
5-  Continental,  Conn  . 

8,491,387 

1,7^2,050 

553*472 
207,848 

7,937*915 
1,454,202 

6.  Columbia,  Mo  

2,824,169 

249.2SO 

2,^74,019 

7.  Life  Association,  Mo  
8.  Am.  Nat'lL.  &T.,  Conn. 
9.  American,  Pa  . 

i,935>s4° 
668,758 

I,3O2,S33 

417,279 
66,876 
4^4,  I9S 

1,518,567 
601,882 
848,338 

Seven  small  companies  .  . 

1,190,012 

533^8 

657,004 

TOTALS 

$2I,OQ3XOO 

$3,011,448 

$18,082,052 

Includes  Hahnemann,  Ohio,  and  Economical  R.  I. 
Liabilities  include  a  loss  of  $5,446,749  in  scaling  policies  in  1877. 
Includes  St.  Louis  Mutual,  Atlas  and  De  Soto. 
Includes  Empire  State  Mutual,  N.  Y. 

16 


accessible  show  the  total  loss  to  policy-holders 
by  failures  among  American  life  companies  to 
be  about  thirty-five  million  dollars,  nearly  all 
of  which  occurred  during  this  period. 

The  statutes  applicable  to  winding  up  in- 
solvent companies  were  entirely  inadequate, 
and  much  expensive  litigation  was  necessary  to 
determine  what  the  law  really  was.  Meanwhile 
the  waste  and  extravagance  of  receiverships 
went  on  until  they  became  almost  as  great  a 
scandal  as  the  mismanagement  of  companies 
that  had  brought  them  into  being.  The  situ- 
ation was  more  acute  in  New  York  State  than 
elsewhere  because,  of  the  forty-six  companies 
which  ceased  doing  new  business,  twenty-seven 
had  their  domicile  in  that  State.  Governor 
Robinson  called  attention  to  the  subject  in  his 
annual  message  of  1878,  and  the  delegates  to 
this  Convention  at  its  meetings  in  1877  and 
1878  adopted  resolutions  deploring  the  evils  of 
receiverships,  and  pledging  themselves  to  make 
every  effort  to  save  companies  from  receivers' 
hands.  The  Legislature  did  but  little  to  pro- 
tect the  interests  of  policy-holders,  and  the  ill- 
timed  denunciation  of  Life  Insurance  indulged 


in  by  some  of  its  members  often  failed  to  dis- 
criminate between  well-,  and  ill-managed  com- 
panies, and  so  added  to  public  distrust.  The 
insurance  legislation  of  this  period  in  New 
York,  which  was  intended  to  be  remedial,  was : 
A  law  (in  1873)  limiting  the  Superintendent's 
charges  for  examining  companies  to  actual 
expenses,  and  providing  a  specific  method  of 
payment;  a  law  (in  1876)  requiring  the  com- 
panies to  give  thirty  days'  notice  of  premiums 
falling  due  before  declaring  policies  lapsed ;  a 
law  (in  1877)  forbidding  life  companies  to  re- 
insure risks  without  the  written  consent  of  the 
insured,  and  authorizing  receivers  to  re-insure 
the  whole  or  any  part  of  the  risks  of  insolvent 
companies;  a  law  (in  1879)  regulating  and  ex- 
pediting the  winding  up  of  insolvent  compa- 
nies ;  and  a  non- forfeiture  law  (in  the  same 
year)  which  was  somewhat  less  liberal  in  its 
provisions  than  the  terms  which  were  freely 
granted  under  the  policies  of  most  companies. 
The  value  of  these  measures  of  relief  will  be 
apparent  when  I  say  that  a  failure  involving  a 
very  heavy  loss  to  policy-holders  occurred  in 
1883,  several  years  after  the  last  law  mentioned 
was  enacted.  18 


Other  important  legislation  of  the  period 
was  the  reciprocal  valuation  law  (1873);  the 
law  (1873)  allowing  a  life  company  to  purchase 
its  own  policies  issued  in  favor  of  a  wife  with 
reversion  to  children;  the  law  (1879)  allowing 
such  policies  to  be  assigned ;  and  the  Massa- 
chusetts law  (1880)  requiring  the  companies  to 
pay  a  cash  surrender  value  if  requested  at  the 
end  of  any  year  after  the  first. 

The  loss,  to  solvent  companies,  of  business 
as  well  as  of  prestige,  during  this  period,  was 
very  great.  In  1870  the  income  of  the  com- 
panies doing  business  in  New  York  was  $105,- 
000,000,  in  1879  it  was  $76,000,000;  in  1870 
the  new  business  was  $588,000,000,  in  1879  it 
was  $168,000,000;  in  1870  the  risks  in  force 
were $2, 02 4, ooo, ooo,  in  1879  they  were  $  1,440,- 
000,000.  Notwithstanding  the  removal  of  so 
many  competitors  from  the  field,  the  business  of 
the  thirty-one  solvent  companies  was  less  in 
1879  tnan  tnat  of  the  same  companies  in  1870; 
their  income  was  two  millions  less,  their  risks 
in  force  were  seventy  millions  less,  and  their 
new  business  had  fallen  off  over  one-half.  The 
total  new  paid-for  business  of  all  the  compa- 


nies  in  1879  was  nearly  thirty-eight  million 
dollars  less  than  has  since  been  written  in  one 
year  by  a  single  company. 

Yet  all  these  losses  and  failures  are  but  a 
part — and  a  small  part  at  that — of  the  loss  and 
failure  which  overtook  the  business  interests  of 
the  country  generally  during  the  same  period. 
The  financial  panic  of  1873  marked  the  cul- 
mination of  the  over-trading,  over-building  and 
over-capitalization  which  resulted  naturally  from 
the  inflation  of  the  currency  during  the  Civil 
War.  Life  Insurance  had  grown  more  rapidly 
than  any  other  business  of  equal  magnitude; 
its  failures  and  losses  were  proportionally  much 
less.  At  the  end  of  1873  the  entire  capital 
account  of  the  railroads  of  the  country  was 
about  thirty-eight  hundred  million  dollars,  and 
during  the  next  six  years  roads  representing 
nearly  one  thousand  millions  were  sold  under 
foreclosure  or  went  into  receivers'  hands.  The 
assets  held  by  failing  life  companies  amounted 
to  about  one-ninth  of  the  total;  the  assets  of 
defaulting  railroad  companies  represented  over 
one-quarter  of  the  total.  About  one-fourth  of 
all  the  savings  banks  in  New  York  went  out  of 

20 


existence  during  the  six  years  following  1871, 
with  losses  amounting  to  about  four  and  one- 
half  million  dollars.  The  Superintendent  of 
the  Banking  Department,  commenting  on  these 
failures,  said,  if  the  funds  of  all  savings  banks 
in  the  State  had  been  invested  in  United 
States  bonds  in  1871,  the  shrinkage  would  have 
been  seven  million  dollars;  if  in  the  best  rail- 
road securities,  it  would  have  been  over  thirty 
millions;  if  in  the  best  bank  stocks,  thirty-five 
millions;  and  if  in  real  estate,  from  forty  to 
fifty  millions. 

It  has  been  the  custom  of  writers  who  would 
exalt  Life  Insurance  to  give  scant  space  to  the 
discussion  of  the  failures  and  losses  of  this 
period;  but  to  my  mind  there  is  no  period  in 
Life  Insurance  history  that  deserves  more  care- 
ful study,  and  none  that  contains  more  valuable 
lessons  to  the  life  insurance  manager.  Why 
did  these  companies  fail?  A  true  and  com- 
plete answer  to  that  question  would  put  every 
officer  and  every  trustee  of  a  life  company  on 
his  guard  against  like  causes  and  a  like  catas- 
trophe. As  we  have  already  seen,  these  fail- 
ures were  contemporaneous  with  many  other 

21 


failures  in  the  business  world,  and  something 
must  unquestionably  be  allowed  for  the  great 
shrinkage  in  values,  as  measured  by  the  cur- 
rency of  the  country,  between  1864  and  1879. 
But  the  companies  that  survived  and  increased 
in  strength  were  obliged  to  meet  the  same 
conditions, — how  did  they  escape?  A  study 
of  the  reports  of  this  period  shows  but  very 
little  charged  off  to  profit  and  loss  by  the  fail- 
ing companies;  but  a  study  of  their  condition 
at  the  time  of  failure  shows  a  great  gulf  be- 
tween actual  and  assumed  values  of  assets. 
In  many  of  these  companies  gross  frauds  had 
been  practiced  for  years,  and  a  thorough  ex- 
amination would  have  exposed  them.  In 
others,  loans  had  been  made  on  insufficient 
security  and  with  evident  profit  to  favored  in- 
dividuals. In  some  cases  loans  upon  which 
neither  interest  nor  taxes  had  been  paid  for 
years  were  carried  on  the  books  at  their  full 
face  value.  Such  assets,  under  the  inexorable 
rules  of  a  receivership,  melted  away  like  snow 
beneath  a  summer  sun.  Six  of  the  largest 
failing  companies  having  their  domiciles  in 
New  York  State  made  the  following  showing: 


22 


Real  estate  owned  and  bonds  and  mortgages 
on  real  estate,  at  the  companies'  last  reports, 
$14,160,057;  amount  realized  from  same  by 
receivers,  $4,449,984, — or  about  thirty-one  and 
one-half  per  cent.  All  other  assets,  by  com- 
panies'last  reports,  $4,538,196;  amount  real- 
ized by  receivers,  $2,232,424, — a  little  over 
forty-nine  per  cent.  During  the  continuance 
of  these  receiverships  there  was  received,  in 
addition  to  the  foregoing,  as  interest  and  rents 
on  all  property,  $676,030,  and  $908,302  was 
paid  out  as  real  estate  expenses.  Other  ex- 
penses of  these  receiverships  were  $1,678,172, 
or  a  little  over  twenty-two  per  cent,  of  total 
receipts. 

But  what  brought  these  companies  so  near 
the  "ragged  edge"  of  insolvency,  according 
to  their  own  statements  and  valuations,  that 
their  true  condition  could  no  longer  be  con- 
cealed? For  an  answer  to  this  question  I 
have  tabulated  the  most  important  items  of 
income  and  expenditure  of  the  largest  of  these 
companies,  as  they  appear  in  the  New  York 
reports,  from  1864  until  the  companies  ceased 
doing  business  in  the  State.  The  examination 

23 


covers  seven  New  York  companies  with  an 
average  of  over  twelve  years  of  business,  and 
seven  other-state  companies  with  an  average 
of  over  six  years  of  business.  These  fourteen 
companies  absorbed  by  re-insurance  previous 
to  their  demise  fourteen  other  companies,  and 
together  they  represent  the  bulk  of  the  fail- 
ures, as  regards  amount  of  business  and  losses 
incurred,  that  have  taken  place  among  Ameri- 
can life  insurance  companies.  As  a  standard 
of  comparison  I  have  taken  the  record  for  ten 
years,  1865  to  1874,  both  inclusive,  of  the 
twenty-six  companies  which  were  in  existence 
during  the  period,  1864-1879,  and  which  are 
still  solvent  and  active.  The  following  is  a 
summary  of  the  results  :  (i)  The  Interest  Rate 
of  the  failing  companies  was  nearly  one  per 
cent.  (.86)  less  than  that  of  the  solvent  com- 
panies ;  (2)  Expenses  of  Management  in  the 
failing  companies  were  nearly  seven  per  cent, 
more  of  premium  receipts,  or  about  four  and 
one-half  dollars  more  per  thousand  of  insur- 
ance in  force,  than  in  the  solvent  companies; 
(3)  Death-Claims  Paid  were  nearly  three  per 
cent,  more  of  premium  receipts,  or  nearly  three 

24 


dollars  per  thousand  of  insurance,  higher  in  the 
failing  companies  than  in  the  solvent  com- 
panies. The  higher  rate  of  interest  earned  by 
the  solvent  companies  would  have  given  the 
failing  companies  nearly  four  million  dollars 
more  in  interest  receipts ;  the  lower  rate  of 
expenses  of  management  of  the  solvent  com- 
panies would  have  saved  the  failing  companies 
between  twelve  and  sixteen  million  dollars;  * 
and  the  lower  death-claim  ratio  of  the  solvent 
companies  would  have  saved  the  failing  com- 
panies between  four  and  ten  million  dollars.* 

During  the  period  covered  by  this  review 
the  failing  companies  paid  nearly  nineteen  mill- 
ion dollars  in  dividends  to  policy-holders,  but 
the  ratios,  both  to  premiums  and  to  insurance 
carried  one  year,  were  but  little  more  than 
one-half  as  large  as  in  the  solvent  companies. 
The  results  attained  by  considering  the  ques- 
tion from  opposite  sides  corroborate  each  other; 
for  example,  the  additional  amount  needed  by 
the  failing  companies  to  pay  as  large  dividends 
as  were  paid  by  the  solvent  companies  would 
have  been  (according  as  the  ratio  to  insurance 

*  According  as  it  is  calculated  on  premiums  or  insurance. 
25 


or  to  premiums  is  used)  from  fifteen  to  twenty 
million  dollars;  while  the  saving  to  the  failing 
companies  by  ratios  of  interest,  expenses  and 
death-claims  as  favorable  as  those  of  the  sol- 
vent companies,  would  have  been  from  twenty 
to  twenty-nine  million  dollars.  With  the  same 
rates  of  interest,  expenses  and  death-claims  as 
the  solvent  companies,  the  failing  companies 
might  have  paid  the  same  rate  of  dividends 
and  added  from  five  to  nine  millions  to  surplus; 
the  solvent  companies,  with  almost  exactly 
three  times  as  much  business,  in  the  period 
under  review,  actually  added  over  sixteen  mill- 
ions to  surplus. 


ITEMS  COMPARED. 

Fourteen 
Failing  Companies. 

Twenty-six 
Solvent  Companies. 

Premiums  Received  

$181,311,456 

$542,433,216 

Interest  Received 

2'?,II|?,'3'?O 

107,527,706 

Expenses  and  Taxes  

42,047,901 

89,365,506 

Death  -Claims  Paid  

4^,684,008 

122,526,057 

Dividends  Paid 

18  877,  I4S 

116,003,445 

Assets  at  Interest  One  Year  . 
Insurance  Carried  One  Year  . 
Average  Interest  Rate 

436>I45>764 
3,469,945,312 
5  30  per  cent 

1,747,045,422 
11,706,789,279 
6.  16  per  cent. 

Expenses  to  Premiums  

23.  19  per  cent. 

1  6  47  per  cent 

Expenses  per  $1,000  Ins  
Death-Claims  to  Premiums  .  . 
Death-Claims  per  $1,000  Ins. 
Dividends  to  Premiums  
Dividends  per  $1,000  Ins  
Expenses  and  Death-Claims  to 
Premiums         .      

$12.12 

25.20  per  cent. 
$13.17 
10.41  per  cent. 

$5-44 
A$  39  per  cent. 

$7-63 
22.59  per  cent. 
$10.47 
21.38  per  cent. 
$9.91 

39.06  per  cent. 

Expenses   and  Death-Claims 
per  $  l,ooo  Insurance  

$25.29 

$18.10 

26 


It  seems  clear  from  this  review  that  these 
failures  resulted  from  bad  management,  in  the 
broadest  sense  of  the  term.  It  was  extrava- 
gant, wasteful,  dishonest.  It  paid  too  much 
for  services  rendered;  it  did  not  take  proper 
care  of  the  results  obtained.  The  data  upon 
which  it  proceeded  were  not  deceptive ;  no 
company  failed  because  of  an  excessive  death- 
rate,  nor  (save  in  a  single  case)  because  it  was 
impossible  to  realize  a  rate  of  interest  equal  to 
that  upon  which  its  premiums  were  cast.*  The 
assumption  which  failed  was  that  the  loading 
on  the  net  premiums  would  equal  expenses  and 
losses  on  investments.  Some  of  the  smaller 
companies  were  indeed  honestly-managed,  and 
re-insured  while  solvent;  their  mistake  was 
in  re-insuring  in  badly  managed  companies. 
There  were  others  which  might  have  been 
saved  by  more  judicious  handling  on  the  part 
of  officers  of  the  law;  their  mistake  was  in  ap- 
proaching so  near  the  " dead-line"  that  officers 
of  the  law  could  drag  them  over  it.  In  no 
other  business  is  failure  so  disastrous  as  in  Life 


*The  Universal,  which  assumed  six  per  cent,  interest  in  calcu- 
lating its  premiums. 

27 


Insurance;  in  no  other  is  it  so  unnecessary; 
in  no  other  is  it,  therefore,  so  inexcusable.  It 
is  of  no  use  to  lay  the  blame  of  failure  upon  the 
law  that  makes  a  net  valuation  the  test  of  sol- 
vency, because  this  law  existed  before  most  of 
these  companies  began  business.  That  was 
one  of  the  conditions  of  their  life,  to  be  pre- 
pared for  and  conformed  to,  as  much  as  any 
other  condition.  As  it  is  the  province  of  history 
to  teach  us  how  we  may  avoid  the  mistakes  of 
our  predecessors,  I  venture  to  suggest  the  fol- 
lowing as  some  of  the  safeguards  suggested 
by  this  study : 

1.  The  utmost  care  in  making  investments 
— security  to  be  always  the  paramount  con- 
sideration. 

2.  The   necessity  of  frequent  revaluations 
of  securities,  and  of  their  rigid  adjustment  to 
changing  conditions. 

3.  The  close  study  of  a  company's  business 
upon  the  principles   of  the  "  Gain   and   Loss 
Exhibit"  now  required  by  several   Insurance 
Departments. 

4.  The  assumption,  for  purposes  of  practical 
administration,  of  a  higher  standard  of  reserve 

28 


than  that  by  which  the  company's  solvency  is 
tested  under  the  law. 

The  first  of  these  suggestions  may  reduce 
the  rate  of  interest,  but  it  will  save  the  princi- 
pal ;  the  second  will  prevent  any  serious  reduc- 
tion of  assets  by  insurance  officials ;  the  third 
will  locate  the  fault  of  administration,  if  there 
be  one ;  and  the  fourth  will  preserve  a  strip  of 
neutral  ground  between  the  path  the  company 
has  marked  out  for  itself  and  the  line  to  which 
it  cannot  come  near  with  safety. 

In  1879  the  epidemic  of  failures  which  had 
set  in  nine  years  before  had  run  its  course;  the 
patients  were  nearly  all  dead,  and  the  business 
of  the  remaining  companies  began  to  improve. 
In  1879  the  new  insurance  showed  an  increase 
from  its  lowest  point;  in  1880  insurance  in  force 
showed  an  increase  from  its  lowest  point;  and 
in  1 88 1  the  total  income  showed  an  increase 
from  its  lowest  point.  No  one  but  those  who 
were  familiar  with  the  business  in  those  troubled 
years  can  realize  how  hard  the  struggle  was, 
nor  how  much  effort  was  required  to  regain  lost 
ground.  We  talk  lugubriously  sometimes  of 
the  difficulties  of  getting  business  in  these  latter 

29 


days,  because  of  the  fierce  competition — which 
means,  practically,  that  the  difficulties  are  of 
our  own  creating — ;  in  the  years  which  we  are 
reviewing,  the  whole  outside  world  seemed  in 
arms  against  the  life  insurance  manager.  Not 
until  1886  was  the  insurance  in  force  of  com- 
panies doing  business  in  New  York  as  great 
as  in  1872  ;  not  until  1887  was  tne  total  income 
as  large  as  in  1873;  and  not  until  1888  was 
the  new  insurance  as  much  as  in  1869.  It  took 
from  fourteen  to  nineteen  years  to  repair  the 
losses  which  life  insurance  suffered  by  reason  of 
commercial  depression  and  internal  mismanage- 
ment. 

RISE  OF  ASSESSMENT  SOCIETIES. 

Another  result  of  these  same  causes  was 
that  multitudes  of  men  who  felt  the  need  of  life 
insurance  protection,  sought  a  substitute  for  it 
in  co-operative  and  fraternal  societies.  I  am 
aware  that  there  is  well-founded  objection  to 
calling  the  operations  of  these  societies  in- 
surance, and  it  will  be  stoutly  maintained  by 
some  that  there  is  but  one  system  of  real  life 
insurance;  nevertheless  there  may  be  many 

3° 


systems  of  post-mortem  relief,  and  it  is  hardly 
worth  while  to  quarrel  about  the  name  so  long 
as  we  apprehend  the  fact.  There  is  no  ques- 
tion but  that  many  co-operative  and  fraternal 
societies  operating  between  1870  and  1880,  in 
spite  of  their  imperfect  system  and  because  of 
honest  management,  furnished  better  protec- 
tion to  their  patrons  than  the  level-premium 
companies  whose  demise  we  have  been  con- 
sidering— although  the  latter  were  organized 
upon  plans  that  were  unassailable,  ran  their 
course  of  wickedness  under  the  segis  of  the 
law,  and  died  in  the  odor  (a  very  bad  odor,  to 
be  sure)  of  regularity.  While  the  business 
of  the  level-premium  companies  that  failed  was 
but  a  small  percentage  of  the  whole,  and  there 
were  always  sound  and  well-managed  com- 
panies in  the  field,  yet  the  losses  were  never- 
theless great  and  wide-spread,  and  it  was  little 
comfort  to  one  who  had  lost  the  accumulations 
of  years  to  be  told  that  he  should  have  insured 
in  a  better  company.  A  system  that  furnished 
(or  even  promised)  present  protection  at  low 
cost,  and  did  not  profess  to  accumulate  money 
for  future  needs,  appealed  very  strongly  to 

3' 


men  who  did  not  understand  theories  of  in- 
surance, but  who  were  angry  and  sore  at 
heart  over  losses  under  a  system  that  pro- 
fessed to  be  perfect. 

There  are  no  official  data  for  ascertaining 
the  number  of  co-operative  and  fraternal  so- 
cieties organized  in  the  seventies;  but  there 
are  now  twenty  of  each  class  doing  business 
in  New  York  State,  which  were  organized 
prior  to  1880.  The  first  Handbook  of  As- 
sessment Insurance  was  published  in  1886* 
and  contained  the  statistics  of  367  societies, 
119  of  which  were  organized  prior  to  1880. 
Reports  were  first  required  from  such  socie- 
ties by  the  Pennsylvania  Department  in  1874, 
and  by  the  Massachusetts  and  New  York 
Departments  in  1882.  These  societies  have 
undertaken  to  supply  post-mortem  relief  by 
levying  its  cost  upon  members  in  a  variety 
of  ways.  There  have  been  four  plans  of  as- 
sessment insurance,  all  of  which  are  still  in 
use,  but  which  may  be  stated  in  the  order  of 
their  development  and  of  their  approach  to 
the  level-premium  plan,  as  follows :  (i)  To 

*  By  the  Spectator  Company,  New  York. 
32 


assess  all  members  alike,  for  current  cost  only; 
(2)  to  assess,  for  current  cost  only,  according 
to  a  table  graduated  for  age  at  entrance;  (3) 
to  assess  according  to  a  table  graduated  for 
age  at  entrance,  and  lay  aside  an  arbitrary 
sum  or  proportion  of  assessments  for  a  reserve 
fund;  (4)  to  charge  a  level  premium,  calculated 
upon  assumptions  which  give  rates  approxi- 
mating those  of  level-premium  companies,  lay 
aside  a  reserve  fund  on  the  same  assumptions, 
and  reserve  the  right  to  assess  for  any  de- 
ficiency. The  order  in  which  these  plans  have 
arisen,  as  well  as  their  nature  and  the  actual 
workings  of  each,  clearly  demonstrate  that  if 
an  organization  would  do  what  the  level- 
premium  companies  guarantee  to  do,  it  must 
do  it  in  their  way,  and  that  methods  which 
require  less  from  members  provide  less  for 
members,  and  are  likely  to  miss  the  one  great 
end  of  all  insurance — namely,  the  certainty 
of  indemnity  when  the  loss  occurs. 

The  operations  of  these  societies  have 
been  attended  with  a  large  degree  of  success 
— if  we  measure  success  by  the  number  of 
persons  who  have  joined  them  and  by  the 

33 


aggregate  amount  paid  in  post-mortem  bene- 
fits. If,  on  the  other  hand,  we  regard  their 
claim  to  supply  real  life  insurance  at  a  much 
lower  price  than  that  charged  by  the  level- 
premium  companies,  then  we  must  consider 
them  to  have  totally  failed  of  their  purpose. 
Of  course,  bad  management  has  been  a  fruitful 
source  of  evil  here,  as  well  as  in  level-premium 
insurance.  The  ease  with  which  such  societies 
could  be  organized,  and  their  comparative  free- 
dom from  official  oversight  until  within  a  few 
years,  led  at  one  time  to  a  speculative  craze 
in  policies  upon  the  lives  of  aged  and  invalid 
persons  in  Pennsylvania,  and  fraternal  endow- 
ment societies  have  filched  from  the  people 
of  many  States  amounts  which  rival  the  losses 
of  the  failing  level-premium  companies.*  It 
must  be  observed  also  that  the  experience  of 
these  societies  hab  not  justified  their  philippics 
against  the  expense  rate  of  the  level-premium 
companies.  The  expense  rate  of  the  level- 
premium  companies  doing  business  in  New 
York  State  in  1897  was  less  than  twenty-three 
per  cent,  of  income,  while  in  the  co-operative 

*  Massachusetts  Insurance  Report,  1893,  pages  x-xvi. 
34 


societies  it  was  over  twenty-eight  per  cent,  of 
income,  and  in  the  fraternals — if  we  allow  four 
dollars  per  year  for  lodge  dues — the  rate  was 
over  twenty  per  cent,  of  income. 

The  effect  of  the  operations  of  these  socie- 
ties upon  the  business  of  level-premium  com- 
panies must  be  largely  a  matter  of  guess-work. 
My  own  view  is  that  it  has  been,  in  the  main, 
beneficial.  They  have  taught  people  the  cost 
of  temporary  protection  and  the  value  of 
permanent  insurance.  As  these  societies  usu- 
ally provide  for  no  other  than  post-mortem 
benefits,  it  is  clearly  seen  that  to  furnish  such 
benefits  from  year  to  year  costs  a  considerable 
sum,  even  when  the  member  survives,  hence 
it  is  usually  easy  for  the  level-premium  com- 
pany to  show  that,  if  the  insured  is  willing  to 
pay  a  reasonable  price  for  such  indemnity  in 
case  of  death  during  a  selected  period,  the 
company  will  return  to  him,  if  he  survives 
the  period,  all  his  overpayments,  with  interest. 
The  men  who  join  these  societies  may  be 
divided  into  two  classes — first,  men  who  would 
not  or  could  not,  for  the  time  being,  take  level- 
premium  insurance  ;  and  second,  men  who  join 

35 


the  society  for  term  insurance  and  for  social 
purposes.  There  is  a  constant  influx  of  mem- 
bers from  the  societies  to  the  companies,  while 
the  number  of  those  going  in  the  opposite 
direction  is,  I  apprehend,  very  small  indeed. 
There  are  now  seventy-eight  co-operatives  and 
fifty-five  fraternals  doing  business  in  the  State 
of  New  York ;  these  societies  are  the  largest 
in  the  country,  and  do  the  bulk  of  this  class 
of  business,  yet  their  total  income  is  surpassed 
by  that  of  a  single  old-line  company.* 


II.-i88i-i897. 


The  period  from  1881  to  the  present  time 
has  been  one  of  uninterrupted  progress. 
There  has  been  but  one  failure  of  impor- 
tance, and  the  business  has  steadily  grown  in 
public  favor.  While  it  required  fourteen  years 
to  regain  the  volume  of  insurance  and  income 
reached  in  1872  and  1873,  ^  on^y  required 
seven  years  more  to  double  it.  This  time  the 
increase  came  under  healthful  financial  condi- 
tions ;  it  came  to  companies  which  had  been 

*  The  Mutual  Life. 

36 


tried  as  by  fire ;  and  it  came  to  stay.  The 
notable  features  of  this  period  have  been  a  de- 
cline in  the  interest  rate,  the  rise  of  industrial 
insurance,  the  liberalizing  of  the  policy  con- 
tract, and  an  increase  in  the  expense  rate. 

DECLINE  IN  INTEREST  RATE. 

During  the  First  Convention  of  Insurance 
Officials,  a  committee  headed  by  Mr.  D.  P. 
Fackler  reported  that  in  1870  the  companies 
doing  business  in  Massachusetts  earned  over 
six  per  cent,  interest  on  average  gross  assets. 
Ex-Superintendent  William  Barnes  submitted 
a  voluminous  paper  on  the  rate  of  interest 
to  be  assumed  in  computing  a  life  company's 
liabilities,  in  which  he  said : 

"It  is  entirely  clear  that  a  governmental 
standard  for  valuations  will  be  even  more  than 
safe,  if  the  rate  of  interest  assumed  is  not  in 
excess  of  that  which  can  be  realized  by  invest- 
ments in  the  public  funds.  An  hundred  mill- 
ion dollars  can  now  be  so  invested  at  par,  in 
a  moment,  with  five  per  cent,  interest  payable 
quarterly  and  free  from  national,  state  or 
municipal  taxation.  Beyond  reasonable  ques- 

37 


tion,  investments  can  be  made  in  the  United 
States  public  funds,  for  an  indefinite  period 
of  time,  in  such  a  manner  as  to  realize  four  and 
one-half  per  cent,  interest,  compounded  an- 
nually." 

Other  eminent  authorities*  gave  it  as  their 
opinion  that  six  per  cent,  interest  would  be 
obtainable  on  first-class  securities  for  a  gen- 
eration to  come.  Yet  six  years  later  United 
States  four  per  cent,  bonds  were  selling  at  par. 
The  legal  rate  of  interest  in  the  State  of 
New  York  was  reduced  from  seven  to  six  per 
cent,  in  1879,  taking  effect  on  January  i,  1880. 
In  1884  the  Legislature  enacted  that  on  and 
after  December  31,  1887,  the  official  valua- 
tion of  life  policies  should  be  made  upon  the 
Actuaries'  Table  of  Mortality  with  interest  at 
four  per  cent,  instead  of  upon  the  American 
Table  with  interest  at  four  and  one-half  per 
cent.  Most  of  the  other  States  wherein  the 
latter  standard  obtained  have  made  the  same 
change.  Although  this  change  required  about 
thirty  million  dollars  to  be  added  to  the  re- 

*  David  A.  Wells,  Sheppard  Romans,  Elizur  Wright,  David 
Parks  Fackler  and  C.  F.  McCay.  See  Report  First  Session,  pp.  163, 
167,  168,  170,  and  Second  Session,  p.  88. 

38 


serve  funds  of  companies  doing  business  in 
the  State,  it  did  not  prove  greatly  burden- 
some to  the  companies,  most  of  which  had 
previously  maintained  a  reserve  by  the  higher 
standard  in  order  to  comply  with  the  require- 
ments of  States  wherein  such  higher  standard 
prevailed.  The  average  rate  of  interest  re- 
ceived by  the  companies  doing  business  in 
New  York  from  1871  to  1897  shows  a  de- 
crease of  about  one  and  one-half  per  cent.  * 

It  would  not  be  a  fair  inference  from  the 
foregoing  that  the  decrease  in  the  interest  rate 
will  be  as  great  during  the  next  twenty-seven 
years  as  it  has  been  during  the  twenty-seven 
just  past,  because  by  that  rule  the  rate  would 
in  the  course  of  time  reach  the  vanishing 
point ;  but  we  cannot  fail  to  note  that,  if 
the  interest  rate  realizable  on  Government 
securities  be  taken  as  a  standard,  a  three 
per  cent,  standard  in  1898  would  be  less 
conservative  than  a  four  and  one-half  per 
cent,  standard  was  in  1871.  While  I  would 
not  urge  any  change  in  the  legal  standard 
at  present,  I  would  suggest  that  it  will  be 

*See  table,  page  71. 

39 


the  part  of  wisdom  on  the  part  of  life  insur- 
ance companies  to  make  gradual  provision  for 
such  a  change.  Conservatism  in  the  matter 
of  interest  assumptions  has  been  of  incalcu- 
lable value  to  American  Life  Insurance.  The 
early  companies  were  obliged  to  rely  upon 
English  experience  for  mortality  rates,  and  in 
calculating  their  premium  rates  they  adopted 
the  English  standards  as  to  interest  rates 
also.  This  gave  a  premium  from  which  it 
has  always  been  possible  to  make  a  reserve 
at  the  highest  standard  adopted  by  any  State. 
In  the  Convention  of  1871  a  strenuous  effort 
was  made  by  two  stock  companies,  which 
calculated  their  premiums  on  a  six  per  cent, 
interest  rate,  to  create  an  opinion  favorable 
to  allowing  them  to  make  their  reserves  on 
the  same  interest  basis.  One  of  these  com- 
panies was  the  Universal,  which  failed  five 
years  later,  having  received  an  average  of 
only  five  and  three-quarters  per  cent,  during 
its  whole  history ;  the  other  was  the  National 
of  U.  S.  A.,  still  solvent,  but  now  winding 
up  its  affairs.  If  the  early  interest  assump- 
tions had  not  been  very  much  below  the  rate 

40 


obtainable,  it  is  easy  to  see  that  all  the  early 
companies  might  have  been  seriously  embar- 
rassed, instead  of  being — as  they  always  have 
been — the  very  bulwarks  of  the  business. 

RISE  OF  INDUSTRIAL  INSURANCE. 

Industrial  insurance,  although  in  operation 
in  England  since  1854,  was  first  introduced 
into  this  country  in  1873.  In  1880  three 
companies  were  issuing  this  form  of  indem- 
nity, and  the  amount  in  force  at  the  end  of 
the  year  was  somewhat  over  $13,000,000. 
On  December  31,  1897,  the  number  of  poli- 
cies in  force  was  nearly  eight  millions,  in- 
suring nearly  one  thousand  million  dollars. 
The  amount  insured  under  industrial  policies 
now  exceeds  the  total  life  insurance  in  force 
in  this  country  prior  to  1867.  Its  salient 
features  have  been  (i)  weekly  collections  of 
premiums  at  the  homes  of  the  insured;  (2) 
the  insurance  of  the  whole  family ;  (3)  uni- 
form rates  for  males  and  females  ;  (4)  limita- 
tion of  the  amount  of  insurance  upon  lives 
under  ten  years  of  age  to  burial  fund  pro- 
portions. Premiums  are  five  cents  per  week 

41 


and  upward,  insurance  $15  and  upward.  The 
average  premium  is  about  ten  cents  per  week, 
and  the  average  insurance  about  $125. 

Fortunately  for  the  business  and  for  the 
insured,  the  industrial  business  has  been  done 
by  a  few  companies,  and  those  doing  the  bulk 
of  it  have  been  managed  with  the  highest  in- 
tegrity and  skill.  They  have  sought  to  furnish 
insurance  that  should  be,  first  of  all,  safe,  and 
then  to  make  every  device  for  lowering  its  cost 
inure  to  the  benefit  of  policy-holders.  The 
industrial  companies  have  had  to  overcome 
anew  the  prejudice  which  was  formerly  direct- 
ed against  the  companies  insuring  for  larger 
amounts.  Professional  philanthropists  have 
again  and  again  conjured  up  the  spectre  of 
children  starved  and  murdered  for  the  sake  of 
an  insurance  that  would  scarcely  afford  decent 
burial.  Over  against  the  spectre,  the  industrial 
companies  have  once  and  again  set  the  facts, 
showing  care  in  the  selection  of  risks  and  in 
the  payment  of  claims,  and  the  further  fact 
that  the  mortality  among  insured  infants  is 
lower  than  the  average  infantile  mortality. 
Over  against  accusations  of  placing  burdens 

42 


upon  poverty,  the  companies  have  shown  that 
an  increase  in  industrial  insurance  has  gone 
hand  in  hand  with  an  increase  in  savings  bank 
deposits. 

As  bearing  upon  the  history  of  Life  Insur- 
ance, several  points  must  be  noted : 

i.  The  industrial  companies  have  immense- 
ly broadened  the  field  of  Life  Insurance.  They 
have  not  only  extended  its  benefits  to  a  large 
number  of  persons  insuring  for  small  amounts, 
but  they  have  included  classes  heretofore  con- 
sidered uninsurable.  They  have  demonstrated 
that  it  is  possible  to  ascertain  and  cover  by  an 
adequate  premium  the  risk  of  death  upon  prac- 
tically every  healthy  human  being  who  is  not 
living  in  flagrant  violation  of  moral  and  hygi- 
enic laws.  The  companies  have  been  obliged 
to  contend  with  a  death-rate  among  adults 
over  twice  as  great  as  that  which  has  pre- 
vailed among  the  companies  doing  an  ordinary 
life  insurance  business,  and  to  ascertain  by 
actual  experience  the  death-rate  among  chil- 
dren ;  but  they  have  within  comparatively  few 
years  obtained  the  facts,  and  reduced  them  to 
a  science,  upon  which  they  have  upreared  the 

43 


stately  structure  of  Industrial  Insurance.  The 
number  of  industrial  policies  now  in  force  is 
over  three  and  one-half  times  as  great  as  the 
number  of  ordinary  policies ;  and,  while  the 
amounts  are  small,  who  shall  say  that  the  ser- 
vice done  each  family  is  not  as  great  in  the 
one  case  as  in  the  other  ?  The  poor  of  to-day 
are  often  the  well-to-do  of  to-morrow,  especi- 
ally if  they  observe  the  rules  of  industry, 
economy  and  forethought  which  industrial  in- 
surance is  so  well  adapted  to  teach.  Having 
constantly  before  their  eyes  the  benefits  of 
insurance  in  small  amounts,  they  will  not  fail 
to  see  the  advantage  of  larger  amounts  when 
they  are  able  to  carry  them. 

2.  Again,  the  industrial  companies  have 
shown  that  it  is  worth  while  to  do  small  things 
in  order  to  accomplish  great  things — that  the 
business  will  bear  whatever  expense  is  neces- 
sary to  do  it  in  the  best  way.  The  companies 
have  learned  that  the  industrial  classes  will 
not  save  money  and  pay  for  insurance  by 
quarterly  or  monthly  premiums;  that  they  will 
not  take  insurance  that  involves  remittances 
by  mail  or  by  periodical  payments  at  an  office; 

44 


but  that  they  will  cheerfully  pay  the  cost  of  it 
if  it  is  brought  to  their  homes  and  sold  on 
weekly  instalments.  In  their  personal  atten- 
tion to  policy-holders,  in  their  management  of 
details,  and  in  their  efforts  to  cheapen  the  cost 
of  insurance  to  their  patrons,  the  industrial 
companies  have  shown  a  wisdom,  a  zeal,  an 
invention  and  a  singleness  of  purpose,  that 
may  well  excite  the  admiration  of  their  co- 
laborers  in  the  life  insurance  field.  The  condi- 
tions of  success  seemed  hard,  but  by  accepting 
them  cheerfully  and  paying  the  price  ungrudg- 
ingly, these  companies  have  earned  a  success 
which  is  conspicuous  in  the  annals  of  Life 
Insurance. 

3.  If  we  look  closely  we  shall  perceive  that 
industrial  insurance — so  far  as  it  applies  to  in- 
fants— has  introduced  a  new  principle.  Every 
other  kind  of  insurance  is  indemnity  for  value 
lost ;  infantile  insurance  is  indemnity  for  ex- 
pense incurred.  The  infant  life  has  no  pecun- 
iary value;  it  does  not  produce — it  consumes; 
but,  if  it  ceases,  an  expense  must  be  incurred 
for  its  burial.  The  expense  of  its  maintenance, 
if  it  lives,  can  be  provided  for  by  the  earnings 

45 


of  parents,  because  this  expense — like  these 
earnings — will  be  so  distributed  as  to  require 
but  little  outlay  each  week ;  and  so  the  ex- 
pense, involving  the  instant  outlay  of  a  week's 
wages  or  more,  can  be  met  in  the  same  way 
by  industrial  insurance.  It  is  not  exactly  in- 
surance upon  life,  but,  in  the  language  of  the 
charters  and  of  the  law,  "  insurance  pertaining 
to  life."  To  my  mind,  a  new  dignity  is  added 
to  Life  Insurance  when  it  proclaims  over  the 
cradle  the  sacredness  of  human  affection,  and 
prepares  to  assuage  the  grief  of  the  bereaved 
by  the  assurance  of  Christian  burial. 

CHANGES  IN  THE  POLICY  CONTRACT. 

This  period  has  been  pre-eminently  an 
era  of  changes  in  the  policy  contract.  Not 
only  have  many  new  policy  forms  been  intro- 
duced, but  all  the  old  forms  have  been  made 
more  specific  and  more  liberal  with  respect  to 
the  rights  of  policy-holders.  The  old  rivalry 
between  companies  as  to  the  amount  of  the 
annual  dividend — which  was  always  contingent 
— has  given  way  to  a  rivalry  as  to  benefits 
which  may  be  guaranteed  in  the  policy.  The 

46 


system  of  annual  dividends  has  been  super- 
seded to  a  very  large  extent  by  long-dividend 
periods,  with  the  options  of  continued  insur- 
ance, or  cash  value  at  the  end  of  the  first  divi- 
dend period.  The  option  of  cash  value  is  also 
made  available  under  many  policies  at  the  end 
of  other  periods.  This  change  had  its  origin, 
as  we  have  seen,  as  far  back  as  1869,  and  it 
received  a  new  impetus  when  the  first  ic-year 
dividend  policies  began  to  mature.  In  1880 
Massachusetts  enacted  the  first  cash  surrender 
value  law,  and  the  practice  of  guaranteeing 
cash  surrender  values  at  definite  periods  was 
soon  after  adopted  by  most  companies,  even 
though  annual  dividends  were  continued.  All 
companies  now  guarantee  cash  surrender  val- 
ues. The  companies  which  first  adopted  the 
Tontine  system  restored  the  non- forfeiture 
clause,  and  have  been  among  the  foremost  in 
liberalizing  the  contract. 

Other  new  features  introduced  have  had 
for  their  chief  ends:  (i)  to  relieve  the  policy- 
holder  from  vexatious  restrictions;  (2)  to  assist 
him  in  keeping  the  policy  in  force ;  and  (3)  to 
provide  for  its  certain  and  prompt  payment 

47 


at  maturity.  The  restrictions  removed  have 
been  chiefly  those  relating  to  occupation,  to 
residence  and  travel,  and  to  the  personal  habits 
of  the  insured.  The  usages  of  forty-two  com- 
panies now  doing  business  in  the  United  States 
may  be  summarized  as  follows : 

Residence  and  Travel.  The  policies  of  six- 
teen companies  contain  no  restrictions  upon 
residence  and  travel ;  six  companies  impose 
restrictions  during  the  first  policy  year  only ; 
seventeen  companies  impose  restrictions  dur- 
ing the  first  two  years  of  the  policy;  one 
company  imposes  restrictions  during  the  first 
three  years  of  the  policy ;  and  two  companies 
make  restrictions  continuous. 

Occupation.  The  policies  of  ten  companies 
impose  no  restrictions  upon  occupation ;  six 
companies  impose  restrictions  during  the  first 
year  of  the  policy ;  twenty  companies  impose 
restrictions  during  the  first  two  years  of  the 
policy ;  one  company  imposes  restrictions  dur- 
ing the  first  three  years  of  the  policy ;  and  five 
companies  make  restrictions  continuous. 

Military  and  Naval  Service.  The  policies 
of  nine  companies  contain  no  restrictions  upon 

48 


military  or  naval  service;  six  companies  impose 
restrictions  during  the  first  two  years  of  the  pol- 
icy; twenty-seven  companies  impose  restrictions 
during  the  continuance  of  the  policy.  Among 
the  latter  class  there  is  a  considerable  diversity 
in  the  treatment  of  this  risk.  The  terms  actu- 
ally accorded  to  policy-holders  in  the  military 
and  naval  service  of  the  United  States  dur- 
ing the  present  war,  while  showing  equally 
great  diversity,  have  usually  been  more  liberal 
than  those  provided  under  the  companies'  con- 
tracts. 

Intoxicants  and  Narcotics.  The  policies  of 
seven  companies  become  void,  or  may  be  can- 
celed during  a  limited  period,  in  case  of  the 
excessive  use  of  intoxicants  or  narcotics.  In 
some  cases  the  reserve,  or  the  premiums  paid, 
are  returned.  Seven  companies  require  the 
applicant  to  warrant  that  he  is  temperate.  The 
policies  of  twenty-eight  companies  contain  no 
restrictions  on  these  points,  although  the  appli- 
cant's habits  are  inquired  into. 

The  changes  in  the  policy  contract  designed 
to  assist  the  policy-holder  directly  in  keeping 
it  in  force  are:  (i)  grace  in  the  payment  of 

49 


premiums;  (2)  the  privilege  of  re-instatement; 
(3)  loans  on  the  policy;  (4)  automatic  non-for- 
feiture conditions.  The  usage  of  the  companies 
upon  these  points  is  as  follows: 

Days  of  Grace.  The  policies  of  sixteen  com- 
panies provide  that  a  grace  of  thirty  days,  or  of 
one  calendar  month,  shall  be  allowed  in  the 
payment  of  premiums;  the  policies  of  twenty- 
six  companies  make  no  concessions  on  this 
point. 

Privilege  of  Re-instatement.  The  policies 
of  fifteen  companies  make  provision  for  re- 
instatement within  periods  ranging  from  thirty 
days  to  twelve  months ;  the  policies  of  twenty- 
seven  companies  contain  no  assurance  on  this 
point. 

Loans.  The  policies  of  seven  companies 
make  provision  for  loans  after  being  in  force 
two  years,  those  of  sixteen  after  three  years, 
those  of  five  after  five  years ;  the  policies 
of  fourteen  companies  make  no  provision  for 
loans. 

N on- Forfeiture  Conditions.  The  non-for- 
feiture conditions  of  thirty-one  companies  are 
automatic  in  their  operation,  so  that  an  insur- 

50 


ance  value  once  acquired  under  a  policy  cannot 
be  lost ;  the  policy-holder  receives  it  in  some 
form  whether  he  makes  request  for  it  or  not. 
The  policies  of  eleven  companies  require  some 
action  by  the  insured  within  a  limited  time  in 
order  to  receive  the  benefits  of  the  non-forfeiture 
clause;  the  policies  of  twenty-seven  companies 
allow  a  choice  between  extended,  and  ordinary 
paid-up,  insurance;  the  policies  of  fifteen  com- 
panies make  provision  for  but  one  form  of 
paid-up  value.  Of  the  twenty-six  companies 
which  allow  extended  insurance,  eighteen  de- 
duct the  premiums  falling  due  under  the  original 
contract,  in  case  of  death  within  a  limited 
period;  eight  companies  make  no  deduction. 

Incontestability.  The  policies  of  thirty-six 
companies  contain  clauses  making  them  incon- 
testable under  certain  conditions ;  the  policies 
of  six  companies  contain  no  such  clauses.  Of 
the  thirty-six,  fifteen  make  their  policies  incon- 
testable after  a  certain  period  upon  the  single 
condition  that  premiums  or  notes  given  there- 
for, with  interest,  be  paid  as  agreed.  Of  the  fif- 
teen, one  makes  its  policies  incontestable  upon 
delivery,  three  after  one  year,  eleven  after  two 

51 


years.  The  incontestable  clauses  of  the  re- 
maining twenty-one  companies  all  contain  some 
further  condition  which  is  binding  during  the 
life  of  the  policy;  but,  subject  thereto,  the  clause 
is  made  operative  by  one  company  from  date  of 
issue,  by  seven  companies  after  one  year,  by 
eleven  companies  after  two  years,  and  by  two 
companies  after  three  years. 

Suicide.  The  policies  of  seven  companies 
contain  no  suicide  clause;  the  policies  of  eight 
companies  do  not  assume  the  risk  of  death  from 
self-destruction  during  the  first  year;  those  of 
twenty-one  companies  do  not  assume  it  during 
the  first  two  years;  those  of  four  companies  do 
not  assume  it  during  the  first  three  years;  and 
the  policies  of  two  companies  never  assume  it 
unless  it  is  proved  to  be  involuntary  or  the 
result  of  insanity. 

This  review  shows  a  great  diversity  of 
treatment  of  the  various  conditions  of  insur- 
ance and  of  the  privileges  allowed  under  the 
policy  contract.  The  encouraging  feature  of 
it  is,  the  liberality  of  all  contracts  as  compared 
with  those  of  twenty  years  ago,  and  the  evi- 
dent effort  which  the  companies  are  making 

S3 


to  remove  unnecessary  restrictions  upon  the 
action  of  the  policy-holder,  to  give  him  as  much 
assistance  in  keeping  up  his  policy  as  is  deemed 
consistent  with  the  highest  good  of  all,  to  make 
sure  that  he  shall  not  lose  acquired  values  by 
neglect  or  oversight,  and  to  give  him  the 
strongest  assurance  possible  that  no  contest 
will  be  made  over  the  final  payment  of  his 
policy.  As  a  chain  is  no  stronger  than  its 
weakest  link,  so  every  condition  and  every 
restriction  imposed  upon  the  policy-holder 
between  the  delivery  of  the  contract  and  its 
payment  as  a  claim,  creates  a  possibility  of 
failure.  It  may  be  remote,  infinitesimal,  but 
it  is  there,  as  a  menace,  and  as  a  preventive 
of  that  certainty  which  the  policy-holder  seeks 
in  insuring.  The  fewer  such  conditions  and 
restrictions  that  are  allowed  to  remain  in  the 
policy,  the  fewer  chances  there  will  be  of  fail- 
ure. The  tendency  already  noted  in  the  man- 
agement of  industrial  companies  has  done 
much  for  the  better  security  of  policy-holders 
in  the  companies  doing  an  ordinary  business. 
That  tendency  is  to  give  the  best  possible 
protection,  taking  no  advantage  of  the  policy- 

53 


holder's  ignorance,  neglect  or  misfortune,  but 
seeking  to  provide  against  these  by  doing  for 
him  whatever  he  will  not  do  for  himself,  pro- 
vided only  he  pays  the  cost.  This  is  insurance 
that  insures,  when  a  company  takes  no  man's 
money  without  rendering  an  equivalent  in  pro- 
tection, according  to  the  expense  incurred, 

THE  EXPENSE  RATE. 

No  review  of  this  period  would  be  com- 
plete which  failed  to  take  note  of  the  increased 
expense  ratio  at  which  the  business  has  been 
transacted.  In  1871  the  ratio  of  expenses  and 
taxes  to  premiums  for  insurance  was  21.61  per 
cent. — the  highest  point  it  had  yet  reached. 
It  then  steadily  declined  to  17.38  per  cent,  in 
1875 — the  lowest  point  since  reached.  From 
1875  ft  increased  to  30.47  per  cent,  in  1894 — 
the  highest  point  yet  reached ;  and  from  that 
it  declined  to  29.28  per  cent,  in  1897.  The 
Wisconsin  Insurance  Report  of  the  present 
year  shows  that  the  expenses  and  taxes  of  all 
companies  doing  business  in  the  State  were  98 
per  cent,  of  the  loading  earned  on  premiums 
received.  If  we  add  to  the  loading  the  gain 

54 


on  lapsed  and  surrendered  policies,  consider- 
ing it  as  a  "surrender  charge  "to  be  used  in 
replacing  retiring  risks,  expenses  will  then  be 
83  per  cent,  of  the  total  amount  available  for 
expenses. 

I  have  on  other  occasions  expressed  the 
opinion  that  expenses  are  too  high,  and  there 
is  no  phase  of  the  business  to  which  I  have 
given  more  careful  attention  than  this.  I  may 
say,  however,  after  an  experience  of  six  years 
as  chief  executive  officer  of  a  large  company, 
that  it  is  much  easier  to  criticise  the  rate  of 
expense  than  it  is  to  say  where  a  reduction 
should  be  made.  While  we  have  made  some 
progress  in  this  direction,  I  am  compelled  to 
admit  that  progress  must  be  slow,  and  that  the 
ratios  of  a  quarter  of  a  century  ago  are  not 
likely  to  prevail  again  for  many  years — if  ever. 
An  examination  of  the  expense  ratio  since 
1871  shows  that  the  years  when  it  was  lowest 
were  the  years  when  comparatively  little  new 
business  was  done,  and  when  Life  Insurance, 
as  a  whole,  was  retrograding.  The  question 
must  be  looked  at  from  various  standpoints  in 
order  to  determine  whether  or  not  a  given 

55 


ratio  is  too  high.  The  business  is  free  to  all 
comers,  and  there  are  over  fifty  level  premium 
companies  doing  business  in  the  United  States. 
They  are  all  anxious  to  reduce  the  rate  of  ex- 
pense, and  each  one  has  an  opportunity  to 
strengthen  its  appeal  for  business  by  so  doing. 
Under  such  circumstances  it  would  seem  that 
the  expense  rate  would  tend  to  regulate  itself 
under  the  stress  of  competition,  here  as  else- 
where. There  are  very  few  things  so  well 
done  that  no  improvements  can  be  suggested ; 
but,  in  practice,  the  improvements  are  not  al- 
ways possible. 

Again,  we  may  look  at  the  question  with 
reference  to  the  compensation  received  by 
those  who  do  the  work.  It  must  be  remem- 
bered that  it  is  a  business  requiring  as  great 
talent  and  skill  as  any  of  the  great  commercial 
interests  of  the  country — banking,  transporta- 
tion, merchandising — and  that  it  is  concentrated 
in  comparatively  few  hands.  I  venture  to  say 
that  the  number  of  persons  who  are  receiving 
large  incomes  in  the  life  insurance  business  is 
smaller  in  comparison  with  the  business  itself 
and  in  comparison  with  the  responsibility  in- 

56 


curred,  than  in  either  of  the  other  callings 
mentioned.  The  salaries  of  all  officers  and 
Home  Office  employes — who  are  usually  sup- 
posed to  enjoy  princely  incomes — comprise 
less  than  nine  per  cent,  of  the  total  expenses 
of  the  life  companies ;  while  taxes,  licenses 
and  fees  imposed  by  law  in  the  various  States 
are  equal  to  nearly  five  per  cent,  of  the  total. 
Shall  we  say  that  the  agents  are  overpaid  ? 
The  great  majority  of  life  agents — like  the 
great  majority  of  men  in  every  calling — have 
hard  work  to  make  a  living.  Of  the  4,000  or 
more  agents  in  the  employ  of  the  New- York 
Life  Insurance  Company  in  the  United  States 
in  1897,  a  large  proportion  of  whom  devoted 
all  their  time  to  the  work,  only  841  wrote  over 
$50,000  insurance  during  the  year  ;  none  of 
the  remaining  3,000  odd  could  have  got  from 
his  commissions  an  income  of  $1,000,  and 
many  got  much  less.  In  contrast  with  this, 
Mr.  Edward  Atkinson  estimates  the  average 
wages  of  specially  skilled  men  in  the  mechan- 
ical trades  at  over  $1,200  per  year,  and  those 
of  average  mechanics  at  over  $700  per  year.* 

*  "  Industrial  Progress  of  the  Nation,"  page  169. 

57 


It  will  probably  be  said  that  the  companies 
are  too  eager  for  new  business,  and  that  they 
spend  too  much  money  in  order  to  make  a 
favorable  showing  in  this  respect.  Suppose 
we  apply  the  same  criticism  to  other  great  en- 
terprises. Open  your  morning  paper  and  read 
the  expensive  advertisements.  These  people 
are  doing  business  for  profit — why  not  save  all 
this  money?  Besides  this  expensive  publicity, 
wholesale  merchants  and  manufacturers  em- 
ploy methods  similar  to  those  of  the  life  com- 
panies, by  maintaining  agencies  in  many  cities 
and  employing  an  army  of  traveling  salesmen. 
They  will  all  tell  you  that  these  expenses  are 
necessary  in  order  to  sell  goods.  The  opposite 
method  has  been  tried  in  life  insurance.  The 
Equitable,  of  London,  pays  no  commissions  to 
agents ;  it  has  been  in  existence  one  hundred 
and  thirty-six  years;  and  it  has  about  $35,- 
000,000  of  insurance  in  force.  It  issues  less 
than  four  hundred  policies  a  year.  No  doubt 
it  takes  good  care  of  such  as  come  to  it ;  they 
get  their  insurance  at  a  low  rate ;  but  very  few 
people  would  ever  enjoy  the  benefits  of  life 
insurance  if  all  companies  pursued  such  a  pol- 

58 


icy.  Isn't  it  better  for  the  community  that  life 
insurance  should  be  placed  before  every  man 
and  urged  upon  every  man,  even  at  the  cost 
incurred  by  American  companies,  than  that  a 
few  should  receive  its  benefits  at  a  low  rate  ? 
The  object  of  a  life  insurance  company  should 
be,  first,  to  insure  men  at  some  rate ;  and,  sec- 
ond, to  make  the  rate  as  low  as  is  consistent 
with  safety  and  with  the  fulfillment  of  its  reason 
for  existence. 

While  I  believe  earnest  and  persistent  ef- 
forts should  be  made  to  reduce  the  expense 
rate,  I  do  not  believe  in  a  cheese-paring  policy. 
"The  laborer  is  worthy  of  his  hire,"  and  the 
man  who  labors  faithfully  for  life  insurance 
should  be  able  to  live  by  life  insurance.  The 
most  inviting  field  for  effort  seems  to  be  the 
prevention  of  lapses.  The  second  year  is  the 
critical  period,  and  the  ratio  of  lapses  in  all 
companies  doing  any  considerable  volume  of 
business  is,  and  always  will  be,  high  at  that 
point.  Various  theories  have  been  tested  by 
different  companies,  and  contracts  have  been 
made  without  renewal  commissions  to  the 
agent,  and  again  with  renewal  commissions. 

S9 


The  results  as  shown  by  the  reports  to  the 
Insurance  Department  indicate  that  the  re- 
newal commission  has  had  little,  if  any,  effect 
in  reducing  the  lapse  ratio,  and  companies 
which  offer  a  standard  form  of  agency  contract 
based  on  a  renewal  commission  to  the  agent, 
find  their  business  going  off  the  books  just 
about  as  rapidly  as  the  business  of  companies 
operating  solely  on  a  brokerage  basis. 

The  insured  stands  more  nearly  alone  when 
he  faces  his  second  payment.  Even  if  the 
agent  who  wrote  the  application  is  present, 
and  has  interests  to  be  subserved,  other  con- 
siderations predominate.  The  inevitable  reac- 
tion from  the  work  of  the  rebater  asserts  itself 
at  this  point.  In  my  judgment,  the  greatest 
cause  of  abnormal  and  improper  lapse  in  the 
second  year  is  the  deplorable  and  indefensible 
work  of  the  " Lightning  Agent"  or  "  Execu- 
tive Special" — the  Arch  Rebater.  There  are 
natural  and  unavoidable  forces  at  work  which 
will  make  the  lapses  of  the  second  year  higher, 
perhaps,  than  in  any  other  year.  These  causes 
we  can  never  entirely  eliminate — they  are  a 
part  of  the  business.  We  can  only  hope  by 

60 


wise  management  to  reduce  the  loss  to  the 
lowest  practicable  point ;  but  the  man  who  was 
tempted  to  take  his  insurance  in  the  first  in- 
stance because  the  agent  submitted  a  proposi- 
tion which  appealed  to  the  gambling  instinct 
of  humanity,  a  proposition  which  substantially 
offered  to  give  him  something  for  nothing,  not 
only  has  no  intention  of  paying  the  second 
premium,  but  he  has  been  initiated  into  a  vice 
which  spreads  like  a  contagious  disease :  it 
not  only  ruins  him,  but  it  contaminates  and 
ruins  his  neighbor,  and  ultimately  ruins  the 
agent. 

The  second  year  brings  a  man  seriously 
face  to  face  with  the  obligations  of  his  contract. 
If  he  was  well  and  honestly  insured  in  the 
beginning,  if  he  paid  one  hundred  cents  on  the 
dollar,  he  is  mentally  quite  ready  to  go  on. 
The  demand  for  the  second  premium  brings  no 
element  with  which  he  is  not  already  familiar, 
and  raises  no  question  which  he  does  not 
already  understand.  He  feels  that  he  has  had 
nothing  in  the  first  year  for  which  he  has  not 
paid,  and  consequently  he  is  not  mentally  upset 
when  he  meets  the  conditions  of  the  second 

61 


year  which  exact  the  same  cost  for  the  same 
protection.  On  the  other  hand,  when  the  man 
who  received  a  rebate  the  first  year  is  brought 
face  to  face  with  the  serious  part  of  his  con- 
tract, which  dates  from  the  second  premium, 
he  is  mentally  in  the  condition  of  a  gambler. 
He  got  something  for  nothing  the  first  year; 
or  perhaps,  more  correctly  speaking,  he  got  a 
great  deal  for  a  payment  that  was  inadequate 
and  improper,  and  it  is  human  nature  for  him 
to  want  the  same  thing  the  second  year.  It 
is  natural  for  him  to  shrink  from  paying  the 
lawful  price  which  the  second  year  exacts,  and 
he  dodges  the  obligation  which  thereafter  he 
cannot  shirk,  refusing  to  put  more  money  into 
a  contract  which  from  that  time  forth  puts  him 
on  a  level  with  other  men. 

We  cannot  entirely  overcome  what  I  have 
called  the  natural  conditions  surrounding  the 
payment  of  the  second  premium.  Men's  sur- 
roundings change.  Even  when  there  is  no 
rebate  offered,  men  may  be  overpersuaded  by 
the  influence  of  a  stronger  mind.  There  are 
men  who  have  a  proper  sense  of  obligation 
toward  their  families  only  spasmodically.  All 

62 


these  things  affect  our  business  just  at  this  point, 
and  always  will.  We  can,  however,  to  a  very- 
large  degree,  control  the  evil  work  of  the  re- 
bater.  Legislation  on  this  subject  has  done 
something,  but  we  have  learned  from  bitter 
experience  that  it  cannot  reach  the  real  seat  of 
the  trouble.  The  one  power  that  can  effectually 
check  the  rebate  evil  is  the  Executive  Head  of 
each  company  doing  business.  If  the  agents 
of  all  companies  understood  that  rebating  was 
really  prohibited,  not  only  by  law,  but  by  the 
explicit  direction  of  the  Home  Office  of  the 
companies  they  represent,  and  that  back  of  that 
explicit  direction  was  a  fixed  purpose  to  execute 
it,  the  evil  would  be  largely  decreased.  A 
merely  passive  desire  on  the  part  of  Executive 
Officers  will  accomplish  very  little.  The  deter- 
mination to  abate  what  is  more  than  a  nuisance 
must  assume  an  aggressive  form.  The  agent 
must  understand  that  his  superior  officers  will 
not  only  notice  a  case  of  rebate  if  it  is  thrust 
in  their  faces,  but  he  must  also  understand  that 
they  are  looking  for  evidence,  not  only  against 
the  agent  of  some  other  company,  but  against 
him,  and  that  if  evidence  is  found,  punishment 

63 


will  be  swift  and  certain.  Even  this  will  not 
wholly  exterminate  the  evil  practice.  Men  will 
occasionally  steal,  notwithstanding  the  statute 
law  and  the  Ten  Commandments. 

I  hold,  therefore,  that  agency  contracts 
should  be  made  on  the  theory  that  "  the 
laborer  is  worthy  of  his  hire,"  and  that  a 
good  man  is  entitled  to  a  good  living.  The 
apparently  high  expense  rate  of  the  first  year 
that  goes  with  this  theory  is  perfectly  legiti- 
mate and  necessary,  and  in  my  judgment 
Life  Insurance  cannot  otherwise  be  prosecuted 
with  sufficient  vigor  to  fulfill  its  true  mission. 
But  contracts  which,  to  an  outsider,  appear 
to  have  been  cunningly  devised  for  the  pur- 
pose of  helping  the  agent  to  rebate,  are  quite 
a  different  proposition.  The  old  style  renewal 
contract  was  not  devised  for  this  purpose,  but 
in  very  many  ways  it  has  practically  operated 
to  this  end.  There  are  styles  of  agency  con- 
tracts in  force  to-day,  the  product  of  a  later 
age,  which  convey  the  impression  that  they 
are  intended  to  place  in  the  hands  of  the  agent 
exactly  the  tools  which  he  needs  to  carry  on 
this  most  nefarious  trade. 

64 


Rebating  and  lapsing  are  twins,  and  if  I 
may  perpetrate  an  Irish  "bull,"  twins  born  a 
year  apart.  The  lapse  follows  the  rebate,  and 
the  rebate  is  a  direct  offshoot  of  improper 
relations  between  the  agent  and  his  Home 
Office.  This  brings  the  matter  directly  home 
to  those  of  us  who  hold  executive  positions, 
and  raises  the  question  as  to  what  kind  of 
agency  contract  will  secure  new  business  in 
the  best  way,  and  by  that  means  reduce  lapses 
to  a  normal  level  the  second  year.  In  attempt- 
ing to  answer  this  question,  I,  of  course,  pre- 
suppose that  the  Home  Office  is  unalterably 
opposed  to  rebating,  and  is  determined  to 
stop  it,  and  that  it  cannot  be  tempted  by  any 
mere  volume  of  business  into  winking  at  facts 
which  indicate  its  existence,  nor  induced  to 
retain  in  its  service  either  the  large  writer  or 
the  small  writer  if  he  has  been  clearly  guilty 
of  the  rebate  offense. 

Assuming  that  such  executive  intention  ex- 
ists, the  rebate  evil  and  its  twin,  lapse,  are  not 
uncontrollable.  Any  working  system  which 
will  make  it  to  the  interest  of  the  agent  to  do 
his  business  honorably  from  the  beginning  will 

65 


tend  to  check  the  lapse  rate.  The  industrial 
companies  have  found  that  their  best  way  of 
accomplishing  this  is  to  pay  a  commission 
on  the  increase  in  premiums  in  force.  This 
charges  up  all  lapses  to  agents — so  far  as  com- 
missions on  new  premiums  are  concerned — 
and  acts  as  a  wholesome  check  on  the  writing 
of  poor  business  and  on  the  lapsing  of  business 
which  ought  to  persist.  Whatever  we  may 
think  of  the  applicability  of  industrial  insurance 
methods  to  insurance  under  large  amounts,  we 
must  admit  that  the  industrial  companies  have 
overcome  difficulties  that  seemed  insurmount- 
able, and  that  their  experience  and  their  ways 
of  solving  the  problems  that  have  faced  them 
may  at  least  furnish  useful  hints  to  the  rest 
of  us. 

In  the  company  with  which  I  am  con- 
nected we  have  devised  a  plan  for  binding  the 
agent  closely  and  directly  to  the  Home  Office, 
transforming  his  calling  into  a  permanent  one, 
elevating  his  standard  of  character  and  of  the 
treatment  due  to  his  clients.  This  plan  is 
briefly,  a  system  of  annuities  to  agents,  begin- 
ning after  a  definite  period  of  service,  fixed  in 

66 


amount  by  the  persistency  of  the  business 
issued  as  well  as  its  volume  (in  this  feature 
embodying  the  essence  of  the  industrial  com- 
panies' idea  as  to  compensation  of  agents),  and 
continuing  under  well-defined  conditions  for 
life.  The  results  in  our  experience  are  already 
marked  and  gratifying,  and,  while  sufficient 
time  has  not  yet  lapsed  to  afford  a  complete 
demonstration,  I  am  satisfied  that  we  have 
taken  a  step  in  the  right  direction. 

I  have  said  so  much  by  way  of  criticism 
that  I  am  sure  no  one  will  grudge  me  a  par- 
agraph in  praise  of  the  benefits  which  Life 
Insurance  has  conferred  during  the  past  twen- 
ty-seven years.  The  companies  have,  during 
that  time,  received  from  policy-holders  over 
three  thousand  million  dollars ;  they  have  paid 
over  one  thousand  millions  in  death-claims,  and 
nearly  as  much  more  in  endowments,  annuities, 
dividends  and  surrender  values.  It  will  help  us 
to  appreciate  the  significance  of  these  figures  if 
we  compare  them  with  others  which  more 
strikingly  impress  the  imagination.  A  third  of 
a  century  ago  a  terrible  civil  war  raged  in  this 
country  for  four  years.  The  number  of  deaths 

67 


in  the  Federal  armies  is  officially  stated  to 
have  been  over  350,000;  the  National  debt  at 
the  close  of  the  war  exceeded  twenty-seven 
hundred  million  dollars;  and  the  Government 
has  since  paid  in  pensions  over  twenty-one 
hundred  millions.  The  debt  was  so  great  that 
the  Nation's  ability  to  pay  it  was  openly  ques- 
tioned, and  our  pension  legislation  has  been 
the  most  liberal  the  world  has  ever  seen;  yet, 
since  1871,  we  have  paid  out  for  Life  Insur- 
ance more  than  the  amount  of  the  National 
debt  when  at  its  highest  point,  and  the  pay- 
ments of  the  life  companies  to  their  members 
have  nearly  equaled  the  disbursements  of  the 
Government  on  account  of  pensions.  The  Na- 
tion poured  out  blood  and  treasure  like  water, 
and  laid  a  heavy  burden  upon  posterity,  that  it 
might  insure  its  own  integrity  and  perpetuity; 
under  Life  Insurance,  individuals  have  freely 
paid  these  vast  sums  that  they  might  insure 
the  integrity  and  perpetuity  of  their  families, 
and  that  their  posterity  might  be  free.  The 
patriot  who  gives  his  life  for  his  country,  and 
the  man  who  insures  his  life  for  the  protection 
of  his  family,  alike  link  their  being  with  the 

68 


future  by  unselfish  devotion  to  present  duty, 
and  though  they  perish  outwardly,  they  still 
live 

"In  minds  made  better  by  their  presence;  live 
In  pulses  stirred  to  generosity, 
In  deeds  of  daring  rectitude,  in  scorn 
For  miserable  aims  that  end  with  self, 
In  thoughts  sublime  that  pierce  the  night  like  stars, 
And  with  their  mild  persistence  urge  man's  search 
To  vaster  issues." 


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163729250 
334,051,344 


panie 
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35  compa 


35 

" 


ization, 
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897, 


Premium  receipts  since 
Paid  Policy-holders  " 
Assets  December  31,  18 


RECEIPTS  AND  DISBURSEMENTS  OF  ALL  LIFE  COMPANIES 

DOING  BUSINESS  IN  THE  UNITED  STATES,  DURING 

THE  27  YEARS,  1871-1897. 

Insurance  Premiums $3 , 1 39,293, 003 

Annuity  Premiums 49>I55»95I 

Interest  and  Rents 879,830,767 

Total  Income $4,068,279,721 

Death-Claims  Paid $1,051,006,646 

Endowments 84,95 1  >^4O 

Annuities 29, 524,064 

Surrender  Values 426,250,525 

Dividends 413,857,241 

Total  to  Policy-holders $2,005,590,116 

Expenses  and  Taxes $828,302,848 

77  companies — Assets  January  I,  1871 $272, 129,969 

77  companies— Surplus  January  I,  1871 $49,214,206 

56  companies — Assets  January  I,  1898 $1,344,589,632 

56  companies — Surplus  January  I,  1898 $187,794,037 

77  companies — Insurance  in  Force  January  I,  1871  ..  $2,046,254,488 

56  companies — Insurance  in  Force  January  I,  1898  ..  $5,328,072,646 

Industrial  Insurance  in  Force  January  I,  1898 $987,110,692 


UNIVERSITY  OF  CALIFORNIA  LIBRARY, 
BERKELEY 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 

Books  not  returned  on  time  are  subject  to  a  fine  of 
50c  per  volume  after  the  third  day  overdue,  increasing 


to  $1.00  per  volume  after  the  sixth  day.     Books  not  in    » 
demand  may  be  renewed  if  application  is  made  before 
sriod. 


'APR  Q 


>.<*' 


